Revenue sharing: Don't stop at a luxury tax

The same way that the NBA’s owners in their dealings with the NBPA have tried to hit “reset” on the NBA’s CBA as we know it, owners seeking greater revenue sharing can do the same thing vis a vis other owners. Maybe some already have, prompting deputy commissioner Adam Silver to only half-jokingly suggest that mediator George Cohen should mediate the NBA owners’ revenue sharing discussions after he was done with the NBA/NBPA talks.

Under the expired CBA, revenue sharing occurred via a luxury tax that teams would have to pay when their annual payrolls exceeded 1/30 of 61 percent of BRI (less benefits), which was just over $70 million in 2010-11. In that system, teams would very simply pay a dollar-for-dollar tax above the luxury tax threshold, and the non-paying teams would evenly split the luxury taxes. This system hurt teams spending the least on payrolls, as they received the same rebate as teams spending vastly more on their rosters.

In essence, Sacramento could spend $46.7 million and receive the same tax rebate as Milwaukee, who spent $69.7 million. The tax rebate should have been proportional to the competitive advantage that teams ceded to higher spending teams.

A better system would be to create a revenue sharing formula which would incorporate several factors which would serve to level the playing field of team profitability. The following is a non-exhaustive list of factors that should be weighted in determining what a team receives or pays in a revenue redistribution system along with a rationale for each:

1. Market size: The greater the market size, the more a team would pay, and the smaller the market, the more a team would receive. Large market size increases competitive advantage for teams because free agents typically prefer larger markets because of the teams’ greater resources, the lifestyle benefits afforded by big(ger) city living, and the sponsorship opportunities afforded by larger markets. While it’s not a perfect proxy, it’s pretty good.

2. Profits made or losses taken during the prior NBA season: The more that a team lost the prior year, the more revenue sharing should help the team; the more a team profited, the more it should be responsible for contributing to the pot. The NBA is using the argument that since its owners lost hundreds of millions under the last CBA players need to give up hundreds of millions under the new CBA. Past is being used to adjust the future. Well, owners who took a beating under the last CBA should insist that their prior plight come into consideration when crafting a new revenue sharing model.

3. Payroll: This is the classic proxy for competitive advantage that was used for determining revenue sharing under the previous regime. However, it was a rough, break point formula that failed to fully compensate differences in competitive advantage (as detailed above). A better system would be to distribute dollars to teams according to how much their team’s payroll was above or below the luxury tax threshold. The NBA has discussed a system whereby teams spending above the threshold could pay increasing levels based upon different payroll bands. So, a team spending between $67-70 million might pay a dollar-for-dollar tax, a team spending $70-73 might pay a two-dollar-for-dollar tax, etcetera.

4. Honorable Mention – Economic situation facing market: The unemployment rates and levels of disposable income of median individuals within a team’s market could be used as a basis for revenue sharing under the rationale that attendance could suffer despite a team’s best efforts (see, e.g., New Orleans Hornets and Atlanta Hawks). In some ways, a statistic like this one might do better than a team’s profit-loss history because ownership/management can be the cause of an unprofitable business venture, but they are less likely to be to blame for endemic, depressed characteristics of their local economy.

I’ll continue to discuss revenue sharing in another article later this week. Stay tuned.